Don’t Overlook The Balance Sheet

30 September 2009 | talking about Stock Market

This spring will be my 10th year in business for myself. By no means does this make me an experts in business but I have learned a few things along the way. There seems to be two type of businesses; explosive and non-explosive. To define this further lets use the example of a sub shop. Once this sub shop gets operating the revenue for the company should be about steady. Of course there are ups and downs but overall there is not one big pay day. Money just seems to come in each month. This would be an example of a non-explosive business. Then there is the example of an explosive business. This could be a Realtor, loan broker, builder, lawyer, or whatever. These types of businesses tend to have big pay days. Money might not be rolling in everyday but when it rolls in it rolls in big.

Explosive business owners tend to be more exposed to this explanation but non-explosive business owners need to be equally aware. So many explosive business owners are so over joyed by the success of a few deals and are rolling in the money they made. They often are only thinking one thing. How do I deploy this new profit to make the same sale again but only double this time? This is where the problem lies. So many business managers do not have adequate reserves. Business owners tend to try to max out their return on equity. Just because you have $100,000 in the bank does not mean you have to deploy every cent of that.
Small business owners are not as obsessed with their balance sheet as they should be. Every day an owner or manager should ask them self \“If we never made another penny again how many days, months, years could we keep the doors open and the lights on\”? First, the question needs to be answered honestly, next you need to figure out what is a good answer. Every business is different. If you have tons of debt, employees, loans, expenses you will want the number of days/months/years to be higher. Clearly when you are a start up your cash on hand is going to be tough to maintain. What I do as a manager is I grow our balance sheet over time, but never losing focus on the benefit and importance of reserves. So a certain percentage of profit always goes to growing cash reserves, hence growing ability to sustain.
Lastly, look at some of the greatest business minds of all time they horde cash. Warren Buffet, Bill Gates, Jamie Dimon and so on. They always have cash ready to deploy when an opportunity comes about. Even at the small business level having the ability deploy cash and take advantage of an opportunity can better your profit. Lets say you are that sub shop. Lets say you spend $1,000 a month on cups. Another sub shop is going out of business and is selling you a year’s worth of cups for 10 cents on the dollar. If you had the reserves on your balance sheet you can take advantage of the opportunity and help your future profitability. Simple example but that same concept can apply to bigger deals as well.
If you are a small business, a large business, or just an every day person keeping a clear eye on your balance sheet is key to long term success.


tags: balance sheet

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